 |
If the energy sector can get some relief, the overall market will as well. Ed Yardeni, of Yardeni Research, notes that S&P 500 earnings fell 14.1% in 3Q15 over 3Q14. But that becomes a 3.4% rise in earnings when the drag from the energy sector is removed. Of course it’s a lot easier to do that math on paper with conjecture than it will be for energy to actually recover.
The turnaround will need to happen soon. History shows that corporate profits tend to drive the ups and downs of the business cycle. Profitable companies increase advertising spending, increase capital investment, hire new workers, and raise pay to poach talent from other companies. Unprofitable companies shrink.
The chart above shows how the decline in forward-earnings growth (red line) since crude oil peaked in 2014 has already had a negative impact on real capital spending (blue line). Thus, it’s no surprise Q4 GDP growth slowed.
The economy is hurting as low oil prices have had a net negative effect on the economy. The good news: The latest data show forward-earnings growth has pushed back into positive territory. With oil prices closing the week near $34 a barrel, up from a low of $27.56 seen earlier in the month, let’s hope the profits turnaround can continue.
* * *
Gaining Energy
The most-interesting development on the trading front has been the sudden rise of big-cap energy. The stocks are still down big for the year, but they are suddenly catching a bid. One of my favorite mantras is, “Something that can’t happen, won’t happen.” It is not precisely apropos in this case, but it’s applicable to the price of crude oil and its effect on the Persian Gulf and Russia.
Sub-$30 oil probably cannot go on forever because companies will go bankrupt and countries will blow up, taking supply out of the market and restoring equilibrium. If that’s true, then investors will try to catch the turn of oil back toward the high $30s early (“buy the rumor, sell the news,”) and that’s what appears to be happening. These early buyers may be early but value investors are used to the pain, and there’s little denying that prices are very low.
I was talking to an executive at a major Texas oil conglomerate on Thursday who has seen the value of his company stock go down dramatically, but he has faith that management has been through these booms and busts before and will steer the ship to come out on the other side with their Stetsons and pride intact. The best oil men (and women) are risk-takers and risk-managers par excellence, and it seems that institutions are figuring that well-run companies, like Kinder Morgan (KMI), will find a way to win as they have for decades.
The most-important contributor of good humor in the group Thursday was speculation of potential, but so far unfounded, coordinated production cuts from Russia and OPEC. In the morning, crude spiked on word that Russian Energy Minister Alexander Novak said that Saudi Arabia had proposed production cuts of up to 5% by each oil-producing country. He also noted that there was a proposal for a February meeting between OPEC and non-OPEC countries at the oil minister level. However, some OPEC delegates said no meeting had been planned, but that a production cut had been floated by Venezuela and Algeria.
|
How Rich Will You Be? We are on the cusp of the most profitable bull market of our lifetime. Stocks will be driven higher by powerful global undercurrents that Wall Street will either ignore or fail to understand. As the Dow doubles, some stocks will see explosive gains of 300%, 400%, 500% and more. Savvy investors who make the right moves will become very rich! Click here for my free report and to find out how it could make you rich beyond your dreams. |
| Internal Sponsorship |
Who do you believe? Despite oil’s recent moves, there is still a great deal of skepticism about any potential cooperation. The Saudis have focused on fighting for market share, while there have been a number of reports about Russia’s challenges in curbing production given significant private well ownership and the problems associated with the halting of pumps under harsh winter conditions. The difficulty of shutting down production wells cannot be underestimated; it is expensive, and it can be very hard to get the wells working again once the pressure is relieved. Yet these are details; ultimately the best companies will survive.
On the macro front, the latest report on durable-goods orders was significantly softer than expectations. The headline number registered a 5.1% month-over-month drop in December. That was lower than consensus estimates for a 0.3% to 0.7% decline and below November’s downwardly revised -0.5% level. The reading was the fourth decline in the past five months and capped an overall drop of 0.6% for 2015.
* * *
One Direction
Jason Goepfert produced another of his valuable studies on unique price behavior after the close on Tuesday last week. He noted that the large gain for stocks on Tuesday, Jan. 26, was just as lopsided in terms of the volume of buying as Monday, Jan. 25, was lopsided in its selling, and as the buying on Friday, Jan. 22. All three were “all or nothing days” in which the market stormed in a single direction up, down, and then up again.
He reports that the only other time in 60 years we have seen back-to-back-to-back all-or-nothing days was in August and October 2011, the latter of which was a major bottom of the past few years. Whether this is a function of high-frequency traders or whatever else, Goepfert says, such lopsided days have become more common.
 |
Speaking more technically, Jan. 26 marked the second day out of the past three that more than 80% of stocks on the NYSE advanced, and more than 80% of the volume flowed into those stocks. The chart above shows every date since 1950 where this has occurred, along with returns in the S&P 500 going forward.
As you can see, such concentrated buying pressure was almost universally bullish prior to the past decade, when it became more common. Still, returns going forward were mostly good, especially longer term, he notes.
Bottom line: Judging from this study and others, Goepfert figures that the most-likely scenario from super-negative conditions like we saw in mid-January week is for a multi-week to multi-month relief rally, even if we’re in the midst of a new bear market. The most-comparable time period, he observes, would be January 2008. Back then, stocks bounced for several months before cascading into the financial crisis that autumn and winter.
Best wishes,
Jon Markman
P.S. In case you missed Larry Edelson grill CNBC contributors Boris Schlossberg and Kathy Lien on the small economy — and the currency — most likely to generate potential gains of up to 1,587% in 2016 … you can watch it online TODAY only!
The investment strategy and opinions expressed in this article are those of the author’s and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.
{ 10 comments }
I own KMI but have noticed that Weiss gives it a low score.
Good Morning Jon; Excellent article as always,I agree that KMI will weather the storm and rebound as it has in the past. Additionally, I am one who thinks the Saudis will adjust their output sooner rather than later,they have managed to alienate virtually every oil producer in the world-especially fellow OPEC members. The Saudis,through their reckless actions are risking a very possible ‘regime change’ and will soon be forced to face that reality-after all they may be arrogant but they’re not stupid. Best regards, Keith Gornick
JM may have something here. ‘Not to say KMI couldn’t have another small down cycle, first, but we could have a sign of bottoming beginning here. Oil is NOT going to suddenly be replaced by something else. There is need for many billions of barrels, regardless of energy developments, and there is bound to be huge money involved. If KMI survives, it should be a big benefactor.
Whoops, beneficiary.
It would seem that companies in the oil industry that transport or refine and market oil that comes from third parties should hold up pretty well. When their income comes not from finding and pumping crude, but servicing the oil industry their income and profits should be more tied to the volume of oil moved and sold not the price.
The “oil turnaround” will probably happen at some point, however you are naive to think it will happen soon. … The Saudis will continue to manipulate pricing and unless the U.S. oil companies get tax relief or some such incentive, production in the U.S. will remain stagnant. If the U.S. were to adopt a policy through a political and corporate partnership to become energy self sufficient, energy companies, shareholders, workers, and John Q. Public would all benefit. If the U.S. were to adopt such a partnership, the Saudis, Iranians, and indeed the Russians would have one less country to bully regarding energy.
Hi Al
Do you believe we are smart enough here, to make that difference??????
Howard I hope so!!!
Simply returning to its 2015 highs would nearly triple KMI’s price. Add in the modest dividend, and you’re very likely looking at tripling your money in just a few short years. I believe Kim is very clever bet today and will be great benefit earning.
Nuts! Lower oil prices help everyone including the oil company employees. They lower heating bills and transportation costs of every business, which in turn raises their profits part of which is passed on to consumers. Air fares are as low as they have been in 12 years. Everyone saves big time at the gas pumps, with their utility bills and across the board with virtually every purchase. The shale industry is getting clobbered, but it is OPEC’s target. And anyone who is crying about the oil companies deserve to be spanked. You’re crying for multi-millionaires and billionaires. Get real, Jon.